New Offshore Business Structures Fueling Belt & Road International Partnerships

Date: October 16, 2018

The Belt & Road Initiative (BRI) is truly one of the
greatest endeavours in modern history. But to make something so bold and vast a
reality, it is and will take international business cooperation on a scale
never seen before.

The BRI entails truly vast infrastructural projects by
participants from 65 countries. Businesses and governments are coming together
to develop ports, roads, bridges and more along the ancient Silk Road trading
route. This will take new ways of thinking about the mechanics of international
business partnerships. But what is being put in place to ensure these complex
international business partnerships can happen, and are successful for all
those involved?

Offshore partnerships for international investment

To investment in a new country or region, international and
Chinese businesses will often set up a legal entity to manage the project and
the movement of funds. Offshore centres have long been the best choice for such
ventures – the British Virgin Islands (BVI) in particular was the second largest
investor in China from 2006 to 2012, providing US$7.72 billion of inward
foreign direct investment in 2012 alone.

One of the primary reasons why Chinese and international
businesses create legal structures in a territory almost 8,500 miles away is
because it enables their ventures to choose to refer back to the Common Law,
which underpins the BVI legal system. The Common Law has fully developed
jurisprudence and a universally respected judicial system, and contracts under
BVI law are largely straightforward and understandable, in comparison to some
of the more arcane elements of US legal drafting, for example. Many Chinese and international businesses
know that, under BVI law, international interpretations of contracts and
agreements are clearer and less likely to end in contention, especially given
the clarity of the statutory framework that underpins the entities and governs
their dealings.

Vicky Lord, a partner at Harneys said: “From a disputes
point of view, firms are going to get a speedier resolution in a BVI law court,
than they would in many countries where there may be differences in approach
depending on where a party may be from. This means it’s a more assured decision
for all partners involved. Also, if the partnership needs to seek financing it’s
easier to go to the markets with a BVI structure as international banks and
financiers are familiar with it.”

For groups who wish to co-invest so as to build a fund that
can be used to create and fuel BRI initiatives, a Limited Partnership structure
is a natural choice. It allows the investors themselves – both in China and
globally – to be detached from any liabilities the venture may incur. As Lord
noted: “To take part in more innovative ventures, people are looking for more
complicated products beyond just having an offshore holding company.”

Evolving legal partnerships

As BRI projects attract more investors from all over the
world, the traditional legal structures of business entities are evolving,
because what was adequate for businesses in the nineties is no longer fit for
purpose. The law is having to move as quickly as the commercial ideas it is
serving.

The Limited Partnership model that was being used in the BVI
and is still in many other parts of the world is one such law that required an
upgrade. It is based on the English Limited Partnerships Act of 1907 and as
Michael Killourhy, a partner at Ogier noted: “The framers of the old English
law may have been well versed in the professional practice of pre-First World
War Britain, but they never contemplated the world of modern private equity and
hedge funds. Today, Limited Partnership legislation in many jurisdictions often
contains provisions and even whole concepts that are incompatible with the
modern investment industry practice.”

While these issues do not fundamentally undermine the
utility of Limited Partnerships in fund structures around the world, the
tension between commercial requirements and the applicable legal framework has
proved tricky for lawyers: “In the past, we were forced to draft rules around
the old legislation,” said Killourhy. “This meant many complex agreements had
to be drafted, which created uncertainty.”

Quelling fear and uncertainty

Uncertainty is a big driver in dissuading an international
business partnership from taking off. That’s why the BVI recently revitalised
its law so as to bring the Limited Partnership arrangement into the 21st
century – and make it fit for purpose for firms looking to invest in joint
ventures from opposite sides of the globe.

For a start, the law is simpler. As Killourhy noted, the
market position is now the default position of the law, so there is no need to
create a partnership with a lot of additional detail in the margins: “it’s
user-friendly and familiar to those who have incorporated offshore before,” he
said.

In fact, the new model is broadly based upon the successful
incorporation law that has served so many offshore investors well over the
years. This means now, for example, partners can choose whether a Limited
Partnership is formed with or without legal personality, a key issue if capital
is going to be raised using the vehicle. As such, the new law also offers the
ability to publicly register a charge against a Limited Partnership with legal
personality, and obtain priority under BVI law over subsequent charges as
result.

Within the new Limited Partnership law, partners now have
the ability to merge or consolidate Limited Partnerships and to migrate
existing Limited Partnerships to and from the BVI. There are also more
assurances around the reorganization and reconstruction of the structures of
the arrangement.

Far-flung partners coming together to profit from the BRI
may be entering into such an agreement for the first time. This new law will
benefit them in that general partners and limited partner investors will be
given much greater flexibility to define their roles, liabilities and
limitations in respect of the partnership. So limited partners can engage in a
number of activities and remain insulated from being considered managing the
Limited Partnership, and thus risking their limited liability.

Smarter laws lure a broader range of investors

The new Limited Partnership laws have been in place for
almost a year, and Lord notes that the ability to have a more flexible
investment structure is helping drive that interest: “We are seeing an uptick
in vehicles being created offshore for investment funds and an increased
sophistication from global and Chinese investors,” she said.

Lord added that newer business interest for BRI partnerships
are blossoming in the in the emerging markets – notably from the other BRIC
countries and beyond: “We’re seeing a clear shift from the US and Europe; for example the relationship between China
and Brazil is going from strength to strength, and a lot of investment is
coming into Africa from China. As long there is liquidity, investment in BRI
enterprises will increase,” she said.

As the BRI evolves and grows, more international and Chinese
businesses will seek ways to raise funds and then use them on high growth
projects along the new Silk Road. To do so, they will need sophisticated legal
structures that are reliable, trustworthy and will lead to beneficial outcomes
for all parties. This means going forward, offshore Limited Partnership arrangements
will play a major role in the building of the world’s greatest infrastructure
project.